LONDON — The pound is falling against the dollar and euro on Friday morning after confirmation that Britain is set for a hung parliament with no party winning a majority at Thursday's general election.
With all but a handful of results announced, it looks like Theresa May's Conservative Party will fall around 10 seats short of an overall majority after a major surge from Jeremy Corbyn's Labour took dozens of seats away from the Tories.
Sterling had dropped sharply on Thursday evening after the exit poll initially showed that no party would win a majority in the House of Commons. At its lowest, the pound hit 1.2722 against the dollar, a fall of around 2%.
It then rallied a little after early results from the North East of England showed a smaller swing from the Conservatives to Labour than had been forecast by the exit poll.
However, once it became clear that the exit poll was largely accurate, sterling remained fairly subdued, moving very little.
The pound has begun drifting against the dollar again in early Friday trade. Here's how it looks at 7.15 a.m. BST (2.15 a.m. ET), down 0.88% to $1.2717:Investing.com
Sterling's performance against the euro is even worse, down 1.94% to €1.1332 at the same time:Investing.com
The rationale behind the early move in sterling was simply that markets dislike political uncertainty, so the prospect of a period without a government, particularly as the UK heads towards the beginning of formal Brexit negotiations, is not a nice one.
"While the hung parliament result was a shock, the market reaction has also been somewhat puzzling," Kathleen Brooks, research director at City Index wrote in an email a little earlier.
"GBP/USD initially dropped 200 points on the result from 1.2950 to 1.2750, however, as the results have rolled in and confirmed the exit poll result, the pound has remained relatively stable, suggesting that the prospect of a hung parliament and a second vote is not triggering market panic.
"Perhaps the market is looking at this result as a vote for a softer Brexit, which could boost the pound in the long run. However, this is fairly presumptuous of the FX market at this early stage."
While sterling's initial drop was substantial, it pales in comparison to its fall after Britain voted to leave the European Union last June. Here's the chart, showing the respective drops:
Sterling also remains a little above the level it traded at prior to May calling a the election in mid-April.